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RE Arbitrage: Blackstone's Conquer & Divide Strategy of EOP

For those of you who haven't heard the rumors, Blackstone has all but sold roughly $25 billion in Equity Office Properties assets to various buyers. If you were wondering about Blackstone's ultimate strategy given the high premium it paid, they have revealed that "Gordon Gecko" is not just a character in a movie. This time the asset is real estate and not business divisions or spinoffs.

What this deal is a clear example of is Real Estate Arbitrage. I'm sure a handful of people don't really know what the term "arbitrage" means. Some people confuse it with the term "arbitration" and thus may confuse it with the legal process of settling disputes. Here is a generic link to a definition of arbitrage. If you're in the hedge fund or securities industry you practice arbitrage all the time. I tend to think that all business that make money buying and selling something practice some form of arbitrage.

One of the essential elements to arbitrage is the availability of a market that is somewhat liquid. A true arbitrage transaction is where the middleman does not ever hold the asset/security that is being bought and sold. Perhaps he holds it for a split second, but he definitely does not hold it when the market opens or closes.

Blackstone has essentially shown that it can conduct real estate arbitrage. It has bought and sold assets before it has even closed on the original deal. It doesn't take a genius to figure out that they have been lining up suitors for a while. I can only imagine how their list of suitors grew over the public contest for EOP. Only a well connected group of powerbrokers can simultaneously sell billion dollar properties before it has even acquired them.

So the dumb lesson is this: Anytime you own enough of something (in this case US commercial trophy properties) to make the market, you have yourself a pure arb play that is sweet.